A major new oil sands project by international players ConocoPhillips Co. and Total SA is the latest sign of recovery in northern Alberta, a driver of the Canadian economy that had been waylaid by soaring construction costs and a steep drop in the price of crude.
Conoco of Houston and Paris-based Total said Tuesday they are expanding their Surmont project south of Fort McMurray, Alta., to 110,000 barrels a day from a current capacity of 27,000, buoyed by results from the first phase that was completed in 2007. The companies didn't disclose a price, but based on recent industry costs the investment will likely be about $1.5-billion.
Since the financial crisis, oil sands development has proceeded slowly, as some companies retrenched after a period in which they were faulted for expanding too quickly. Today, new projects are considered more carefully, and the Surmont expansion joins a small group that is going ahead, including Suncor's Firebag and Imperial Oil Ltd.'s Kearl.
"It's like building small cities, they're massive projects, the margin of error is pretty sizable," said Andrew Martyn, president of Toronto's Falcon Asset Management. "You need the balance sheet and profit statement to handle these projects."
The second phase of Surmont is a new project, not one that had been under way but shelved last year when the price of oil plunged below $40 (U.S.) a barrel from nearly $150. However, the decision to give a green light to the project is based partially on the fact that development costs have fallen since the boom's peak, said Matt Fox, president of ConocoPhillips Canada.
The volatility of oil prices and construction costs hasn't dissuaded Conoco from investment in the Alberta oil sands, where the company also has a multibillion-dollar partnership with Cenovus Energy Inc. and helped develop the new Keystone oil sands export pipeline run by TransCanada Corp. that could eventually move more than a million barrels a day to refineries in the southern United Sates.
"We see a lot of growth in the oil sands in the next years and decades," Mr. Fox said.
Construction prices are down anywhere from 10 per cent to 40 per cent from the 2008 peak, said analyst Chris Feltin of Macquarie Securities Canada, primarily because of falling steel and labour costs.
"There's a belief within the industry that those companies that can move now and lock in some of the reduced costs and get access to labour while it's being underutilized should be able to generate superior economics," Mr. Feltin told Reuters yesterday.
The Surmont expansion doesn't include a major new environmental technology, but both companies noted that they will use less land, less energy and less fresh water than the first phase. Both use technology that injects steam into wells to recover the raw bitumen, rather than mining the commodity.
Conoco said it is spending $300-million in the next five years on research and development of new technology.
At Total, the company is also busy on work to build its first oil sands mine at Joslyn, north of Fort McMurray, that it acquired in 2005. It has been a Surmont partner since 1999. If it builds long-delayed Joslyn, which could be decided in the next year, Total also wants to build an upgrader near Edmonton to turn the raw bitumen into more valuable synthetic oil.
"This is the first out of a long list of opportunities we will consider," said Jean-Michel Gires, president of Total E&P Canada, which plans to spend as much as $20-billion to develop the oil sands in the next 15 years.
"Our bet on the oil sands is definitely for the long term."